Exchange Rates and FDI: Goods versus Capital Market Frictions
AbstractABSTRACT Changes in exchange rates affect countries through their impact on cross-border activities such as trade and foreign direct investment (FDI). With increasing activities of multinational firms, the FDI channel is likely to gain in importance. Economic theory provides two main explanations why changes in exchange rates can affect FDI. According to the first explanation, FDI reacts to exchange rate changes if there are information frictions on capital markets and if investment depends on firms' net worth (capital market friction hypothesis). According to the second explanation, FDI reacts to exchange rate changes if output and factor markets are segmented, and if firm-specific assets are important (goods market friction hypothesis). We provide a unified theoretical framework of these two explanations. We analyse the implications of the model empirically using a dataset based on detailed German firm-level data. We find greater support for the goods market than for the capital market friction hypothesis. Copyright 2008 The Authors. Journal compilation 2008 Blackwell Publishing Ltd.
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Bibliographic InfoArticle provided by Wiley Blackwell in its journal World Economy.
Volume (Year): 31 (2008)
Issue (Month): 9 (09)
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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0378-5920
Other versions of this item:
- Buch, Claudia M. & Kleinert, Jörn, 2006. "Exchange rates and FDI: Goods versus capital market frictions," TÃ¼binger DiskussionsbeitrÃ¤ge 304, University of Tübingen, School of Business and Economics.
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
- F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
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